Cramer's secret revealed: My method to picking stocks

Jim Cramer does not get up out of bed at 4 a.m. every day just to dish out the hottest stock picks to the CNBC "Mad Money" audience.

He does it because he is passionate about educating investors on the ultimate insider's perspective for the market and how to make money.

"What I'd really like to do is empower you, and that starts with me teaching you all the many tricks I use to pick out great stocks and trade them like a pro," the "Mad Money" host said.

This is why he decided to share the methods that have served him well in his four decades of investing — and to successfully run a hedge fund.

So what does he look for when picking a stock?

One of the easiest ways for Cramer to identify the stocks that should be on his radar is to look at the new-high list. These are stocks that hit a new high in trading for the day, especially on days when the market is in bad shape. If it is hitting a new high on a down day, then obviously it has something good going for it.

Some of my best picks have come out of this process, and hopefully some of yours can, too.

Jim Cramer

When Cramer sees a stock on the new-high list, it is either because it is part of a bull market, it announced fantastic earnings, or there is tremendous sales momentum within the sector.

However, that doesn't mean Cramer recommends chasing after every stock on the new-high list. The list is merely meant to be used as a jumping off point for stocks to start looking at. Then, the time-tested method of doing your homework comes in to play to ensure that the fundamentals of the company are sound.

One thing to keep in mind is that the market is not that hard to play, as long as it is understood that there is often more continuity than change. That means once you buy a stock, things will pretty much keep going the way they were until there is a major shift. Then, you must change your approach and be prepared with a Plan B.

A trick that Cramer likes to use is to wait for a pullback before pulling the trigger to buy a stock. He always tries to buy on weakness and sell into strength. He recommended waiting until a high-quality stock is down at least 5 percent, as that will give you a solid entry point.

"You only buy stocks that have pulled back from the new-high list if you are confident they will make a comeback for substantive reasons not having to do with the market," Cramer said.

But the most important tip is to make sure you understand why a stock has pulled back. Make sure there isn't a really good reason why everyone is selling the stock and driving the price down. Then you could get caught with your hand in the cookie jar!

So make sure that you are eyeing a stock that has been only momentarily damaged, and it isn't a troubled company that is headed down the tubes. How can you tell?

Cramer said that as long as the fundamentals haven't changed and a stock just pulled back for mechanical reasons, such as market-wide panic or profit-taking, you are OK.

"Some of my best picks have come out of this process, and hopefully some of yours can, too," Cramer said. (Tweet This)